Adapting to the Credit Crunch: Strategies for Sustainable Business Growth

Entrepreneurs need constant cash flow to stay competitive. However, the uncertainties in the current economic climate make conducting business even more challenging. Therefore, it’s essential to strategize your operations and take the initiative to create an agile enterprise.

A credit crunch, also known as “credit tightening,” a “credit squeeze” or “credit contraction,” occurs when financial institutions, especially lenders, raise the standards for loan requests due to the need to protect themselves from the turmoil of the larger economic environment. Creditors may require more collateral or higher credit scores before giving out loans, usually at high interest rates.

A credit contraction could be a response to an anticipated or past economic downturn or other adverse economic conditions, such as inflation. The typical consequence of a credit crunch is that individuals and businesses that could previously secure loans to finance major purchases or expand operations now need to find alternative sources to raise capital.

Current Trends and Market Update

Here are five of the top trends and market updates you should pay attention to in 2023 and beyond:

1. According to Goldman Sachs, in 2022, 77% of small businesses were confident about accessing capital from lenders. A year later, that sentiment has shifted, with the same percentage expressing concern about securing capital.
2. Financial jitters following the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank are likely to hit small businesses the most. This is because they receive almost 70% of their industrial and commercial loans from banks with less than $250 billion in assets and 30% from banks with assets below $10 billion.
3. The Federal Reserve has lifted interest rates to as high as 5% to control inflation. Midsize and smaller lenders have faced about $1 trillion in deposit withdrawals, meaning there’s less cash to lend.
4. As of April 2023, the Federal Reserve fears the possibility of a credit crunch, making it challenging to gauge the impact of further hikes on credit and economic growth.
5. A Federal Reserve survey involving senior loan officers released in April 2023 found that creditors tightened lending standards in the first quarter. About 46% raised standards for large and midsize businesses, a 2% increase from the previous year.

How Long Do Credit Crunches Last?

In most cases, credit crunches can last years. Although they’re closely related, they last slightly longer than recessions. Lending is backward-looking, so it drags over a few quarters to impact companies’ systems and financial statements. Consequently, stricter requirements usually take place in the subsequent years.

Strategies for Surviving Bank Credit Crunch

When a credit crunch is anticipated, you want to prepare your business. Here are seven strategies for surviving credit contraction:

1. Increase Your Cash Reserves

Credit squeezes can affect your cash flow, so keeping enough cash on hand to cater to essentials, including inventory and payroll, is vital. Keep track of critical metrics, such as cash conversion cycle, cash ratio, operating cash flow statement, balance sheet gross profit and available working capital. This helps you understand and plan your finances. Also, improving your invoice management enables you to track operations more closely.

2. Strategize Your Spending

Given the circumstances, review your spending after increasing your cash reserves to know what categories of spending are necessary. Your goal is to identify which areas generate the most revenue so you can channel your resources there. That helps you increase your return on investment. A well-structured spending plan can improve your cash reserves, reducing reliance on banks.

There are many ways to you strategize your spending. For example, you may increase orders on the inventory you need most to claim bulk discounts or avoid inflation. Additionally, you can invest in targeted marketing campaigns based on data. Your approach depends on the nature of your industry and business.

3. Push Back Payments

One of the best defensive measures to consider when a credit squeeze strikes is to delay some of your payments if possible. For example, while delaying rent payments and utility bills can be challenging, you may negotiate the extension of due dates with some suppliers. Vendors may be willing to work with you if you have a history of making prompt payments. You can also renegotiate payment structures if your supplier or vendor is willing to extend your repayment dates.

4. Make a Solid Case

Qualifying for and securing loans is becoming increasingly challenging for entrepreneurs. Thus, try to stand out from the crowd to increase your chances of success. That could mean reviewing your credit history for errors or creating a downside plan that shows your lenders how you’d repay the loan in case operations decline. Tell your story, back it with facts or data and talk creditors through why the numbers are what they are.

5. Understand Your Collateral

Secured loans offer banks a safety net when extending lines of credit. However, financial institutions are tightening their standards even further in response to the uncertainties of the current economic climate. It’s vital to maintain or increase your assets’ value and ensure they’re free from competing interests, encumbrances and liabilities.

6. Do Your Homework

Banks look into your background before granting loans. Using the same approach on the banks can provide helpful insights. If the bank is public, you may obtain information about their reserves, loan quality and overall performance before applying. Additionally, listen to customer feedback to know what to expect. Because while some banks are tightening their standards, others remain flexible. This information can help you decide which lenders to prioritize.

7. Leverage Factoring Services

Factoring has emerged as a viable alternative for most individuals and businesses finding it difficult to secure bank loans. It provides a lifeline for entrepreneurs of varying sizes and bridges the gap created by the strict lending requirements. Companies that leverage factoring services usually have faster access to capital, reduced risks of losing collateral and enhanced flexibility, as the amount can increase as the business grows.

Partner With Porter Capital for Your Financing Solutions

In an economic climate where credit tightening is rising, businesses need flexible and reliable financing options to navigate the uncertainties. Porter Capital understands these challenges and is committed to supporting your business in achieving its goals. Our services allow you to secure financing quickly to improve your cash flow. Contact us now and take advantage of our comprehensive financing solutions!